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Five Morningstar 500 Funds That Lagged in 2013

Caution and natural resources held these funds back in 2013.

Russel Kinnel, 01/24/2014

I told you about the top-performing Morningstar 500 funds in 2013. In all, there were 11 in the top percentile.

Now it's time to look at the worst relative performers. There were none in the bottom percentile, but there were two in the next-to-worst and three more in the third-from-worst.

The theme of most of these five laggards was caution. In a year when stocks skyrocketed, it's not surprising that conservative funds would lag. Two of the funds have big cash stakes.

Another theme is exposure to natural resources plays of one kind or another. Slowing growth in China and lower inflation in general hit natural resources stocks hard.

Appleseed APPLX
This focused socially responsible investing fund is more aggressive than cautious. Its problem is pretty obvious as it's right at the top of the portfolio. The fund has a 13% position in Central GoldTrust GTU a closed-end fund that only invests in gold bullion. Ouch. That fund lost 26% of its value in 2013. Appleseed also owns a 5% position in Sprott Physical Gold Trust PHYS, which lost about the same amount. The rest of the portfolio was pretty respectable, but the fund's 19.1% return put it in the next-to-last percentile of mid-value funds. Despite a dismal 2013, the fund is still well ahead of the S&P 500 since its 2006 inception.

Royce Low Priced Stock RYLPX
Manager Whitney George had a rough year as the fund gained just 12.9%. The Silver- rated fund had a sizable basic materials bet to the tune of about 14%. While that's a fairly small amount of the portfolio, even a small stake in a money-losing sector can kill your performance when just about everything else is up 20%-40%. George has trimmed the bet a little, but the returns are still weak. The fund isn't simply a bull market laggard, though. It was middling in 2008 but surged in the rally years of 2009 and 2010 only to get smacked in the tough year of 2011 as well as the past two years. The fund's 15-year numbers are still strong, but recent returns have been dismal. It needs a rally in materials to turn around.

Amana Growth AMAGX
The first part of any performance story about an Amana fund is always the fund's lack of financials. It follows Sharia principles, which forbid it to invest in companies that loan money at interest. It sailed through the financial crisis but has a rough go of it when financials rally, as in 2013. The fund returned a modest 22.8% due to a lack of financials exposure and some sluggish tech names like Sap SAP and Apple AAPL. Retailer PetSmart PETM also held it back.

Virtus Foreign Opportunities JVIAX
This fund's defensive consumer names and overweighting in India held returns to a meager 5.4%. In addition, Rajiv Jain hasn't been able to find many sustainable growth stocks in Japan and China. Missing out on Japan really stung last year. Still, the fund has thumped peers and the MSCI EAFE since Jain took the helm in 2002.

First Eagle US Value FEVAX
It's not surprising that this fund would lag in a rally. Although Jean-Marie Eveillard is no longer running the fund, his belief in putting safety first remains a driving force at the fund. It still holds some cash and gold for a rainy day, and it tends to own cheap defensive names that management hopes will bear up in a down market. Some of its defensive names like Microsoft MSFT and Comcast CMCSA did just fine, but some value tech stocks and some energy names held the fund back. Thus, the fund gained a relatively modest 16.9% in 2013. The good news is that the amount it lagged the S&P 500 by last year was matched by the amount it outperformed in the bear market.


Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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